Split-Dollar Insurance
5/24/2004
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A split-dollar insurance plan is yet another practical and valuable employee benefit plan for businesses to selectively reward and retain their key employees.
Similar to an executive bonus plan (see discussion in our last week's "tip"), a split-dollar insurance plan is easy to implement, with very few, if any, restrictions that apply to a group insurance plan or other qualified plans.
By engaging a split-dollar insurance plan, a company and its major shareholders can save taxes, provide valuable protection to both the business and its key employee(s), and transfer business interests to family members or key employees with high flexibility and effectiveness.
Split-dollar insurance works like the following: two parties, often an employer and an employee, share insurance premiums, proceeds, and sometimes cash values of a life insurance on an employee’s life. (A “private split-dollar” insurance is between two individuals).
What will such an insurance plan accomplish?
First, a company provides a valuable reward as well as strong incentives (to stay with the company) to its key employee(s).
At the same time, as the company shares the policy’s cash value and death benefit, a split-dollar insurance plan provides financial protection to the employer, too.
Another positive factor is that the company can deduct life insurance dollars when the employee’s share of premium is paid by the company and treated as bonus to the insured employee. (And it’s not unusual for a business to pay the employee’s portion as bonus to sweeten the plan).
With immediate tax deduction on premiums (for the company), tax-sheltered cash value accumulation inside the policy and income tax-free life insurance proceeds (for both), the plan could be a very powerful, and sometimes the most feasible way to fund transfers of a company’s equity and protect both the company and its key employee’s best interest.
If you want to find out more about split-dollar insurance, please do not hesitate to call us.
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